Bernanke Seen Pressing On With Stimulus Amid Debate on QE
Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers will probably forge ahead with their unprecedented bond buying when they meet next week, even as they pick up a debate that began in December on when to end the purchases.
The job market has yet to show the “substantial” gains Bernanke said he wants to see before halting asset purchases. Unemployment has persisted at 7.8 percent or higher since January 2009 while Bernanke held the main interest rate near zero and expanded the Fed’s assets to a record $3.01 trillion. Meanwhile, all 19 Federal Open Market Committee participants see no immediate threat from inflation, now at 1.4 percent.
The Fed chairman can count on the FOMC to endorse the current program to buy $45 billion in Treasury notes and $40 billion in mortgage bonds each month, said Nathan Sheets, Bernanke’s top adviser on international economics from 2007 to 2011. Six Fed officials have indicated in interviews and speeches that the central bank probably won’t pare its stimulus yet, and two district bank presidents who advocate record easing, Charles Evans of Chicago and Eric Rosengren of Boston, gained voting power this year in an annual FOMC rotation.
Fed officials in a Jan. 30 statement “will emphasize that they are committed to providing exceptional stimulus until the labor market shows more pronounced signs of recovery,” said Sheets, who is New York-based global head of international economics at Citigroup Inc. “The chairman seems to have a firm grip on the FOMC and the overall trajectory of policy.”
Bernanke, whose term ends next January, said last week the unemployment rate in December “is not an acceptable situation,” especially when 39 percent of the jobless haven’t worked for six months or more.
There are “too many people whose skills and talents are being wasted,” he said at an appearance in Ann Arbor, Michigan. “We’ll be assessing the impact of our actions on financial market conditions and looking to see how those link up to developments in labor markets and in the broader economy.”
The FOMC during its two-day meeting next week will probably discuss when to curb its bond-buying program, Sheets said. Minutes from the Dec. 11-12 FOMC meeting revealing the debate and released on Jan. 3 pushed stocks lower and bond yields higher. The Standard & Poor’s 500 Index fell 0.2 percent that day and yields on 10-year Treasuries rose 0.07 percentage point.
“Markets overreacted to the minutes,” said Dean Maki, chief U.S. economist at Barclays Plc in New York. “Nothing in the minutes said the FOMC is going to be anything less than supportive of the economy in the coming months.”
The S&P 500, the benchmark for U.S. equities, was almost unchanged today at 1,494.83 at 4 p.m. in New York, while the yield on the 10-year Treasury note increased 0.03 percentage point, to 1.85 percent. The yield has increased from 1.72 percent on Sept. 13, the day the Fed announced its third round of quantitative easing, while stocks have climbed 4.8 percent this year.
The FOMC will probably reduce its pace of purchases around mid-year “if the unemployment rate is making steady declines” and continue bond buying throughout 2013, Maki said.
“There’s a reasonably high bar to stopping the stimulus altogether,” he said. “We would expect that only to happen as the unemployment rate gets close to 7 percent.”
The minutes from last month’s meeting show FOMC participants differing over how long the purchases should last. Officials who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.
In its statement last month, the FOMC said it will keep rates near zero as long as the jobless rate is above 6.5 percent and inflation is forecast to be 2.5 percent or less. Previously policy makers said they would keep interest rates low through at least mid-2015.
The unemployment rate has been at 7.8 percent in three of the last four months. The Fed’s Beige Book report, which provides an anecdotal account of the U.S. economy for discussion at the FOMC’s Jan. 29-30 meeting, said “labor market conditions remained mostly unchanged.”
Rosengren said in a Jan. 15 interview that he supports current policy and sees scope to ease further if the economy deteriorates significantly.
Consensus on the FOMC that inflation will stay low “gives us ample running room to ensure the economy grows a little bit more rapidly and we actually do get improvement in labor markets,” Rosengren said.
Fed officials agree that inflation doesn’t pose an imminent threat. None of the 19 FOMC participants expects inflation to reach 2.5 percent through 2015, according to their December forecasts.
“I am a hawk but I’m not worried about it right now,” Fisher, who doesn’t vote on policy this year, said in a Jan. 17 interview, using a term for policy makers who favor comparatively aggressive measures to avert inflation. “I’m not worried about it in the foreseeable future.”
Inflation as measured by the personal consumption expenditures price index rose 1.4 percent in November from a year earlier. The Fed aims for price increases of 2 percent.
Rosengren and St. Louis Fed President James Bullard, who also is a voting FOMC member this year, are among officials who have discussed what may prompt a halt to the purchases. Rosengren said an unemployment rate at 7.25 percent would be his threshold while Bullard said a level near 7 percent may be sufficient.
Bullard has offered a mixed assessment of bond buying, saying to reporters in Madison, Wisconsin, on Jan. 10 that “it’s a very aggressive policy and it is making me a little bit nervous that we’re over-committing to easy policy.” Still, “inflation has been somewhat below target so we have some room on that dimension,” he said.
Kansas City Fed President Esther George, who also became an FOMC voter this year, has been more pointed in her skepticism toward open-ended bond buying.
“Like others, I am concerned about the high rate of unemployment, but I recognize that monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it,” she said in a speech this month.
The newest of the Fed’s 12 district bank presidents, George has never before voted on monetary policy. Her predecessor at the Kansas City Fed, Thomas Hoenig, dissented against every FOMC decision in 2010, saying the Fed was too accommodative.
George will probably dissent, and Bullard’s vote for the FOMC majority view is “questionable,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. That still leaves Bernanke with most policy makers backing more accommodation.
“The chairman holds all the cards and a substantial majority back him in his drive to rev up the economy’s growth engines to bring the unemployment rate down lower,” Rupkey said. “We don’t see the story line changing as long as Bernanke is the Fed chairman.”
While Fed officials are voicing concern about the potential costs of expanding Fed assets, Bernanke made it clear on Jan. 14 that he is more worried about the outlook for the labor market, said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York.
“He seemed to reiterate that the primary benefit for the Fed right now is to lower the unemployment rate” and the “cost of high long-term unemployment is enormous for the economy,” Meyer said. “He is going to stay the course and engage in QE.”
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